Inland Revenue v George

For inheritance tax business-property relief, the question whether a business consists wholly or mainly of making or holding investments requires a qualitative assessment viewed through the eyes of a reasonable businessman.

Where land is exploited by charging site fees, rent or licence fees, that activity is an investment business. Activities incidental to the exploitation of the land, including supporting services, take on the investment character even if they generate additional profit. The court must identify the scope of the investment business and then assess whether it constitutes the whole or main business.

The Commissioners of Inland Revenue appealed against a decision of the Special Commissioner released on 15 July 2002. The deceased had held 85 per cent of the shares in Dunton Park Caravan Sites Limited, which operated residential and touring-caravan facilities, a country club and other activities.

The issue was whether the company’s business consisted wholly or mainly of making or holding investments for the purposes of sections 104 and 105 of the Inheritance Tax Act, 1984. If so, the shares would not qualify for business-property relief.

1. Appeal allowed. The Special Commissioner had adopted an incorrect approach by treating the exploitation of the company’s land as ancillary to the provision of services to residents. The correct analysis required the court first to identify any investment business, then to determine its scope, and finally to assess whether the company’s business consisted wholly or mainly of making or holding investments.

2. Exploitation of proprietary rights in land by receiving site fees for the right to place mobile homes on the land, and fees for caravan storage, constituted the holding of an investment. Services connected with those facilities, including the supply of water, electricity and gas, were ancillary to that investment business. Their profitability did not prevent them from being incidental to the underlying land-based activity.

3. The scope of an investment business includes the core holding of land and receipt of rent or fees, together with activities which an average businessman would regard as incidental to that core activity. An activity primarily supporting another business activity is treated as part of the supported activity.

4. The assessment under section 105(3) is qualitative rather than quantitative. It requires consideration of the quality, purpose and nature of the company and its activities, viewed through the eyes of the reasonable businessman.

5. Applying that approach, the core and main activity of the company was holding investments in land. Of its four major activities, only the country club and caravan sales were non-investment businesses. The shareholding therefore qualified for no inheritance-tax relief under the relevant provisions.

• High Court (Chancery Division): allowed the Commissioners’ appeal from the Special Commissioner’s decision released on 15 July 2002.